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Is the Fortescue share price a buy for dividends?

Is the Fortescue Metals Group Limited (ASX: FMG) share price a buy for dividends?

During FY19 the iron ore business paid out a massive $1.14 per share in fully franked dividends, bringing the trailing total grossed-up dividend yield to 19.5%.

It’s very unlikely that the FY20 total will be as big as FY19. In FY20 Fortescue is expecting C1 operating costs to be a bit higher and Brazil mining giant Vale is likely to be essentially back up to full production again, which may lower the global iron ore price somewhat.

In FY20 Fortescue expects the total dividend pay out ratio to be between 50% to 80% of full year net profit. If it were to earn the same profit in Australian dollar terms in FY20 that would equate to a dividend yield of 12% to 15% today.

Perhaps the next 12 months of dividends will be good. But iron ore prices are not likely to stay this good forever, it never does. Resources go through ups and downs. One projection for Fortescue earnings per share (EPS) in FY21 is AU$1.08, which would be a material decrease from FY19’s earnings.

Ultimately, Fortescue’s profit results are dependent on it getting a good price for its iron that it ships to customers.

Foolish takeaway

For me, the idea of investing in resource shares revolves around the idea of predicting economic growth and demand from places like China – which is notoriously hard to do. It might be best just to wait until iron ore prices have dropped lower before thinking about buying Fortescue shares.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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